USCB Financial Holdings, Inc.

Good morning, and thank you for joining us today for USDB Financial Holdings' second quarter 2023 earnings call. With me today reviewing our second quarter highlights is CFO Rob Anderson and Chief Credit Officer Ben Passos, who will provide an overview of the bank's performance, the highlights of which you can see on slide three. The past quarter saw the market react, process, and respond to the collapse of three high-profile regional banks. The news unsettled financial markets triggered a crisis in confidence amongst consumers and a deposit flight to the perceived safety of our too-big-to-fail brethren. At U.S. Century Bank, we build business relationships based on the best-in-class service, products, and people as our clients look to us for support and guidance. The USCB team responded immediately to the March events, contacting our clients directly to assail their concerns, answer their questions, and most importantly, educate them on their options for obtaining additional FDIC insurance coverage. To this point, the bank has reduced its uninsured deposit ratio by 10% over the past two quarters, as interested clients opt for available ICS and CDERS deposit products at U.S. Century Bank. Our efforts have been very well received. Deposit outflows were quickly curbed and the slowdown in loan demand experienced from mid-March through early May has dissipated. The loan closings in June were amongst the highest we've had in the past 18 months, and a growing quality loan pipeline is again strong, well-diversified, and reflecting consistent quarter-over-quarter increases in our weighted average coupon. We will review this progress in greater detail shortly. On a management level, our previous Board of Directors Chair, Dr. Ida Levitan, passed on the chairman's baton to me this past month for the full support of our board of directors. The board also confirmed Mr. Kirk Wyckoff, managing partner of Patriot Financial Partners, as lead director. I am grateful for the privilege of closely working with Dr. Levitan these past years, look forward to continuing collaborating with Mr. Wyckoff, and thank our board for their continued trust and support. On page three, in terms of growth, both loans and deposits have been growing at or above our stated guidance over the prior year. Liquidity improved over the past quarter, and as I stated, we assisted many clients into insurance deposit products. Net income was $4.2 million, or 21 cents per diluted share, and our ROAA was 0.77%, compared to 1.08% for the second quarter of 2022. Profitability was impacted by continued inverted yield curve and exacerbated by the bank failures of this past March. The banking sector's challenge of NIM compression continued in Q2 as deposits repriced faster than new loan yields. We believe that we are at or near an inflection point on our NIM as loan demand is back on track and pricing increases. In terms of capital and credit, both remain strong. During the quarter, the company repurchased 77,603 shares of USCB Financial Holdings Inc. at a weighted average price per share of $9.58. As of June 30, 2023, 172,397 shares remain authorized under the program. The following page is self-explanatory, directionally showing nine selected historical trends since recapitalization. Profitable performance based on sound and conservative risk management is what our team is focused on consistently delivering. So let's now turn our attention to our specific financial results and key performance indicators, which will be reviewed by our CFO, Rob Anderson.

Okay, thank you, Lou, and good morning, everyone. As Lou mentioned, U.S. Century Bank is dealing with a very challenging operating environment, and our second quarter results reflect this environment. While we review our second quarter results, I will be pointing out Why our management team feels more confident about the future. But first, let's cover the quarter. Total assets were $2.2 billion for the quarter. Loan balances were $1.6 billion. And deposits are at $1.9 billion. At quarter end, we had $439 million in securities. And like most banks in the industry today, these securities were put on the books during the pandemic period of very low interest rates. As interest rates have taken a fast and sharp rise, these securities now have a negative mark due to the mark-to-mark accounting treatment. Roughly 50% of these securities are treated as held to maturity, and the other half as available for sale. Total equity is now $184 million, flat to the prior quarter, although footnoted on the slide, the $184 million in equity includes $47.1 million in unrealized losses on the securities portfolio in AOCI. Moving on to the P&L, net interest income decreased from prior quarter and prior year as we deal with an inverted yield curve for an extended period of time. Non-interest income was relatively flat to the prior quarter, and as mentioned on our last call, the bank implemented CECL on January 1st of this year, and our provision expense was nominal for the quarter, as improved economic forecast drove a small reduction in expected loss rates, and this was partially offset by net portfolio loan growth during the quarter. Expenses were up from the prior quarter, and there are some moving pieces there, so I'll cover that slide in more detail in a few minutes. On a gap basis, net income was $4.2 million, or $0.21 a share, down from the prior quarter and prior year. Overall, I would characterize this quarter as reflective of a difficult operating environment. We are dealing with an inverted yield curve that has hung around for a long time, and it was just worsened by the recent bank failures in March. Moving on to our key performance indicators, in terms of soundness, our credit metrics remain strong. Our loan loss reserve coverage was down slightly to 1.18%. In terms of profitability, return on average assets was 0.77% and return on average equity was 9.13%. Our NIM was 2.73% and down 49 basis points from the prior quarter, driven by several factors, which I'll cover in more detail. Efficiency ratio was 65.25% and our tangible book value per share moved up slightly to $9.40, which is reflective of the negative mark of $2.41 per share on our securities portfolio and AOCI that I referenced earlier. Absent the AOCI mark, our tangible book value per share would have been $11.81. So let's cover deposits on the next page. A big part of our NIM story hinges on our deposits. First, in abundance of caution, given the recent bank failures, we brought in $50 million of brokered CDs at a weighted average rate of 4.98% to boost liquidity. Second, we finally experienced the mixed shift that most of our competitors experienced earlier in this rate cycle. On average, DDA balances dropped $62 million this quarter as clients sought out higher returns in money market and CD products. This movement had a more profound impact on our deposit costs, which moved up 70 basis points to 1.99%. Relative to the Fed funds rate increases, this puts the through-the-rate cycle deposit rate at 36%. Average DDA balances comprise 32.1% of total deposits at quarter end, which demonstrates the strength of our deposit book. If you take a closer look at our Deposit book on the next slide, our deposit base reflects our business model, a diversified commercial bank. 50% of our deposits are commercial accounts. 36% personal accounts, 11% public funds, which are partially collateralized, and 3% broker deposits. The total amount of uninsured deposits adjusted by the collateralized portion of public funds is 49%. Excluding the collateralized portion of public funds, the uninsured are 53%. I'd also point out that our ending spot balance of 1.921 billion is above our average balance for the quarter, demonstrating sustained growth at quarter end. So let's move on to liquidity. During the quarter, we strengthened our liquidity to 853 million, and this excludes our ability to tap the brokered or listing CD markets. As stated on our last call, the Federal Reserve created a new liquidity program to make additional funding available to depository institutions, We have enrolled in the bank term funding program but have not accessed the program and do not intend to access the program. Our on-balance sheet liquidity is $309 million, and our off-balance sheet sources, excluding brokered and listing CDs, is more than $544 million. We feel confident that these liquidity sources are adequate for us to navigate the current environment. So with that, let me turn it back to Lou to discuss our loan book.

Thank you, Rob. On page 10, on slide 10, we see the average loans excluding PPP loans increased 22.5 million or 5.8% annualized compared to a prior quarter and 290.1 million or 22.7% compared to the second quarter 2022. Directionally, portfolio loan yields have increased 109 basis points compared to the second quarter 2022, a trend that will continue through 2023. Let's see that in greater detail on slide 11. A slowdown in loan demand was noted from mid-March through early May 2023, immediately after the SVB triggered bank crisis. Market uncertainties made business clients and prospects understandably knee-jerk, but as the market has settled and fears of contagion have abated, production is back on track. As we see in the graphic on the left-hand side, Quarter to quarter, the weighted average coupon on new production continued to increase from 444 basis points in Q2 2022 to 720 basis points in Q2 2023, or 189 basis points above the portfolio average. In June 2023, gross closings topped 50 million, and the active pipeline has been reconstructed in a well-diversified composition That is, at a pre-SVB run rate, reflecting an estimated go-forward coupon of over 750 basis points for Q3. Portfolio diversification has been a focus of the management team, and over the past seven years, we have developed and added several non-CRE business verticals to our product lines, including association lending, SBA lending with a focus on variable 7 loans, yacht loans, and correspondent banking. As you can see on the loan composition graphic provided, 26% of the current portfolio is non-CRE as of Q2 2023, up from 9% at Q2 2020. The trend for greater loan diversification has picked up the pace in 2023 as the total new loan volume in Q1 and Q2 was respectively 66% and 81% non-CRE.